Application of Enterprise Risk Management at Airports (2012)

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A I R P O R T C O O P E R A T I V E R E S E A R C H P R O G R A M ACRP REPORT 74 TRANSPORTAT ION RESEARCH BOARD WASHINGTON, D.C. 2012 www.TRB.org Research sponsored by the Federal Aviation Administration Subscriber Category Aviation Application of Enterprise Risk Management at Airports Marsh risk Consulting New York, NY i n a s s o c i a t i o n w i t h hntB Corporation New York, NY a n d DireCt effeCt solutions, inC. Pickerington, OH

AIRPORT COOPERATIVE RESEARCH PROGRAM Airports are vital national resources. They serve a key role in trans­ portation of people and goods and in regional, national, and inter­ national commerce. They are where the nation’s aviation system connects with other modes of transportation and where federal respon­ sibility for managing and regulating air traffic operations intersects with the role of state and local governments that own and operate most airports. Research is necessary to solve common operating problems, to adapt appropriate new technologies from other industries, and to introduce innovations into the airport industry. The Airport Coopera­ tive Research Program (ACRP) serves as one of the principal means by which the airport industry can develop innovative near­term solutions to meet demands placed on it. The need for ACRP was identified in TRB Special Report 272: Airport Research Needs: Cooperative Solutions in 2003, based on a study spon­ sored by the Federal Aviation Administration (FAA). The ACRP carries out applied research on problems that are shared by airport operating agencies and are not being adequately addressed by existing federal research programs. It is modeled after the successful National Coopera­ tive Highway Research Program and Transit Cooperative Research Pro­ gram. The ACRP undertakes research and other technical activities in a variety of airport subject areas, including design, construction, mainte­ nance, operations, safety, security, policy, planning, human resources, and administration. The ACRP provides a forum where airport opera­ tors can cooperatively address common operational problems. The ACRP was authorized in December 2003 as part of the Vision 100­Century of Aviation Reauthorization Act. The primary participants in the ACRP are (1) an independent governing board, the ACRP Oversight Committee (AOC), appointed by the Secretary of the U.S. Department of Transportation with representation from airport operating agencies, other stakeholders, and relevant industry organizations such as the Airports Council International­North America (ACI­NA), the American Associa­ tion of Airport Executives (AAAE), the National Association of State Aviation Officials (NASAO), Airlines for America (A4A), and the Airport Consultants Council (ACC) as vital links to the airport community; (2) the TRB as program manager and secretariat for the governing board; and (3) the FAA as program sponsor. In October 2005, the FAA executed a contract with the National Academies formally initiating the program. The ACRP benefits from the cooperation and participation of airport professionals, air carriers, shippers, state and local government officials, equipment and service suppliers, other airport users, and research orga­ nizations. Each of these participants has different interests and respon­ sibilities, and each is an integral part of this cooperative research effort. Research problem statements for the ACRP are solicited periodically but may be submitted to the TRB by anyone at any time. It is the responsibility of the AOC to formulate the research program by iden­ tifying the highest priority projects and defining funding levels and expected products. Once selected, each ACRP project is assigned to an expert panel, appointed by the TRB. Panels include experienced practitioners and research specialists; heavy emphasis is placed on including airport pro­ fessionals, the intended users of the research products. The panels pre­ pare project statements (requests for proposals), select contractors, and provide technical guidance and counsel throughout the life of the project. The process for developing research problem statements and selecting research agencies has been used by TRB in managing cooper­ ative research programs since 1962. As in other TRB activities, ACRP project panels serve voluntarily without compensation. Primary emphasis is placed on disseminating ACRP results to the intended end­users of the research: airport operating agencies, service providers, and suppliers. The ACRP produces a series of research reports for use by airport operators, local agencies, the FAA, and other interested parties, and industry associations may arrange for work­ shops, training aids, field visits, and other activities to ensure that results are implemented by airport­industry practitioners. ACRP REPORT 74 Project 01­18 ISSN 1935­9802 ISBN 978­0­309­25851­7 Library of Congress Control Number 2012945650 © 2012 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not­for­profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB or FAA endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not­for­profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The project that is the subject of this report was a part of the Airport Cooperative Research Program, conducted by the Transportation Research Board with the approval of the Governing Board of the National Research Council. The members of the technical panel selected to monitor this project and to review this report were chosen for their special competencies and with regard for appropriate balance. The report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the Governing Board of the National Research Council. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board, the National Research Council, or the program sponsors. The Transportation Research Board of the National Academies, the National Research Council, and the sponsors of the Airport Cooperative Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report. Published reports of the AIRPORT COOPERATIVE RESEARCH PROGRAM are available from: Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet at http://www.national­academies.org/trb/bookstore Printed in the United States of America

The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. On the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, on its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. The Transportation Research Board is one of six major divisions of the National Research Council. The mission of the Transporta- tion Research Board is to provide leadership in transportation innovation and progress through research and information exchange, conducted within a setting that is objective, interdisciplinary, and multimodal. The Board’s varied activities annually engage about 7,000 engineers, scientists, and other transportation researchers and practitioners from the public and private sectors and academia, all of whom contribute their expertise in the public interest. The program is supported by state transportation departments, federal agencies including the component administrations of the U.S. Department of Transportation, and other organizations and individu- als interested in the development of transportation. www.TRB.org www.national-academies.org

C O O P E R A T I V E R E S E A R C H P R O G R A M S CRP STAFF FOR ACRP REPORT 74 Christopher W. Jenks, Director, Cooperative Research Programs Crawford F. Jencks, Deputy Director, Cooperative Research Programs Michael R. Salamone, ACRP Manager Marci A. Greenberger, Senior Program Officer Joseph J. Brown-Snell, Program Associate Eileen P. Delaney, Director of Publications Ellen M. Chafee, Editor ACRP PROJECT 01-18 PANEL Field of Administration Brian P. Gabel, Greater Toronto Airports Authority, Toronto, ON, Canada (Chair) David Y. Bannard, Foley & Lardner LLP, Boston, MA Mirna M. Berg, Rio Tinto/Kennecott Utah Copper, South Jordan, UT Richard G. Gorman, Reno-Tahoe Airport Authority, Reno, NV Paul Hanly, Ricondo & Associates, Chicago, IL William R. Hoyt, Metropolitan Airports Commission, Minneapolis, MN William Schuller, FAA Liaison Miranda Horan, Airports Council International–North America Liaison Christine Gerencher, TRB Liaison

ACRP Report 74: Application of Enterprise Risk Management at Airports is a guidebook that begins with a summary of the principles of enterprise risk management (ERM), its benefits, and how it applies to airports. The guidebook then discusses implementation of the iterative ERM process including roles and responsibilities from the governing board to all staff members. The accompanying CRP-CD-117 (available online at http://www.trb. org/Main/Blurbs/167515.aspx) is an electronic tool that can be used to support the ERM process and catalog identified risks in a risk register with expected likelihood of occurrence and expected severity of impact on the airport to generate a risk score and a risk map. Once the risk score has been developed, mitigation strategies can be put in place and documented using the response plan work sheets within the electronic tool. Because ERM is iterative and scalable to airports of any size and with varying resources, airport directors and managers of airports of all sizes will be able to use the framework outlined in this guidebook to more proactively manage threats and opportunities. Enterprise risk management (ERM) is a proactive approach by which threats to and opportunities for an organization are identified, evaluated, and integrated across all disci­ plines. The aim of ERM is to determine how to exploit opportunities and mitigate, transfer, or avoid threats. Airports are conducting risk management activities, but they often aren’t being coordinated on an enterprise level. Coordination allows information gleaned through the process to be used in the strategic planning process, the decision­making process, and the allocation of limited resources. Airports are becoming familiar with risk management activities, as the Federal Aviation Administration (FAA) begins to require Safety Management Systems (SMS) at airports. ERM and SMS both use the same principles, tools, and techniques, so those airports that have implemented SMS will find the adoption of ERM to be familiar. Marsh Risk Consulting was retained under ACRP Project 01­18 to identify the benefits of ERM, to delineate application and implementation steps for airports, and to provide an electronic tool to prepare a risk classification matrix. The guidebook also reviews lessons learned from the experiences of other industries that have implemented ERM as well as the experiences of airports that have implemented this approach. F O R E W O R D By Marci A. Greenberger Staff Officer Transportation Research Board

1 Summary 6 Section 1 Introduction 6 1.1 Objective 6 1.2 How to Use This Guidebook 8 Section 2 Airport ERM 8 2.1 What Is ERM? 9 2.2 Value of Implementing ERM at Airports 11 2.3 ERM Guidance/Standards 13 2.4 Elements of an ERM Framework 13 2.5 Examples of Airport ERM in Practice 16 Section 3 Governance and Infrastructure 16 3.1 ERM Policy and Strategy 18 3.2 Determine Risk Appetite 18 3.3 Developing a Risk Appetite Statement 19 3.4 Sponsorship and Positioning 21 3.5 Develop a Governance Structure 24 Section 4 The ERM Process 24 4.1 Identification of Risk 28 4.2 Prioritization of Risk 31 4.3 Review of Risk Controls 32 4.4 Risk Response Planning 35 4.5 Monitoring Risk 36 4.6 Reporting Risks 39 4.7 Electronic Tool 40 Section 5 ERM Implementation 40 5.1 Develop an Implementation Plan 40 5.2 Scalability 40 5.3 ERM Maturity 42 5.4 Resourcing 43 5.5 Establish an ERM Culture 45 Section 6 Integration of ERM 45 6.1 ERM and SMS 46 6.2 ERM and Strategic Planning/Decision­Making 50 Section 7 Continuous Improvement and Sustainability 50 7.1 Evaluating the Success of ERM Performance 50 7.2 Staff Development 50 7.3 Hints and Tips to Sustain ERM C O N T E N T S

53 Appendix A Definitions and Acronyms 57 Appendix B Example Maturity Model 61 Appendix C Electronic Tool: User Instructions Note: Many of the photographs, figures, and tables in this report have been converted from color to grayscale for printing. The electronic version of the report (posted on the Web at www.trb.org) retains the color versions.